Gaming: Regulation of Structured Behaviour in China

CHINA (June 2, 2023) — ‘Ichiban Kuji’ is a generic name for a series of entertainment products originated in Japan and released by Banpresto. Banpresto is a long-established Japanese game and entertainment company under Bandai Co Ltd, one of the most famous entertainment companies and toy suppliers in Japan. Ichiban Kuji was later introduced to China by Bandai Namco Entertainment (Shanghai) Co, Ltd and has become a popular lottery game in the country.

Entry to Ichiban Kuji is sold in the form of raffle tickets, which consumers can purchase offline and exchange for physical prizes. Unlike blind boxes, which are limited to the same category of products (doll figures), Ichiban Kuji runs lucky draw themes on a range of different subjects, including the current most popular animation intellectual property (IP). At the same time, it diversifies the types of prizes that can be redeemed with the raffle tickets (including large garage kits, animation or game derivatives, mugs and character cards).

Each set of Ichiban Kuji comprises a fixed number of prizes and is ranked according to the cash value of the prizes (A, B, C, D, etc, in descending order). The prizes for tiers A to D are usually popular, rare and of high collection value, attracting more consumers to participate in the lucky draw.

In Japan, Ichiban Kuji tickets are generally sold offline in major convenience stores. In China, several offline retail stores authorised by Bandai for Ichiban Kuji have been launched.

As the sales market of Ichiban Kuji continues to expand, Bandai has opened an online shopping platform (referred to as the ‘online mall’) on WeChat. The products in the online mall are divided into two categories: the Ichiban Kuji series and single products. The sales method of single products is the same as that of ordinary products, and consumers can place orders directly to obtain the corresponding products. In contrast, the Ichiban Kuji series in the online mall are limited to value exchange via double chance, which means that after the player has purchased Ichiban Kuji coupons offline in retail stores, not only can they redeem prizes, but they are also given a second chance to participate in the lucky draw in the online mall using the complimentary code on the coupon.

Magic rewards

‘Magic rewards’ were introduced by one of China’s leading anime, comic and games community sites for its premium members. Magic rewards have become the revenue pillar for the site, estimated to have accounted for around 80 per cent of its e-commerce revenue.

To participate in magic rewards, consumers choose from a prize pool with different price thresholds and product types and purchase a single-entry ticket to participate in the lucky draw at a fixed price. They will be randomly awarded a product listed in the prize pool. The products drawn and awarded in the higher-priced pool have a higher cash value.

Magic rewards offer prizes in different product categories at varying price ranges, including computers, communications and consumer electronics (3C) equipment and garage kits and derivatives stemming from popular anime IPs, such as Arknights, Fate, Demon Slayer and Neon Genesis Evangelion. The prizes are drawn in the form of cards, and the prizes are divided into ‘editions’ (eg, legendary edition, lucky edition, hidden edition and ordinary edition) according to the market reference value. The site clearly indicates the probability of winning each product and the corresponding market value. Consumers are guaranteed a prize in the ordinary edition. The ordinary edition’s market value is equal to the amount paid for a single-entry ticket in the lucky draw.

Taking 3C equipment as an example, in the prize pool for gaming mice, each participation in the lucky draw requires the payment of a fixed amount; therefore, in essence, magic rewards sell a chance to draw. This operating model has the characteristics of ‘aleatory behaviour’.

When consumers place orders to participate, they need to read and click to confirm the ‘Magic Rewards Service Agreement’ before they can access the payment interface. There are no references to lotteries or similar aleatory behaviour in the agreement; rather, it describes magic rewards as a merchandising service provided by the platform to consumers. In view of this, although magic rewards appear to constitute aleatory behaviour, there are no hollow prizes, and their essence is still the sale of goods at a fair price and on a real transaction basis. This avoids the consequences that would otherwise arise from the sale of ‘pure probability’ and being deemed as an invalid civil legal act.

Compliance with Chinese laws and regulations

Given their operating models, Ichiban Kuji, magic rewards and blind boxes are all essentially examples of aleatory behaviour and should strictly adhere to the following principles to meet the compliance needs of existing laws and regulations in China.

Real and legitimate merchandise trading

Transactions should be based on real and legitimate merchandise trading, not on the sale of pure probability. If no merchandise is being sold, and what is sold for a consideration is pure probability, without any return, then the nature of the transaction will constitute a lottery as regulated under article 2 of the Lottery Regulations, as well as an act of gambling.

For example, the ‘one-dollar purchase’ model involves each participant paying 1 yuan to subscribe to one percentage point of the total probability, with only one participant ultimately obtaining the good while the other participants obtain nothing. The one-dollar purchase model ostensibly involves a sale of physical goods, but what is actually being sold is the chance of winning or pure probability. This essentially constitutes a lottery ticket sale as regulated by the Lottery Regulations, which, without the State Council’s permission, would constitute an illegal act.

In contrast, the function of double chance in Ichiban Kuji is not deemed a lottery ticket sale, although there is also a chance that the player will not earn anything from the online lucky draw. This is because the chance to participate in the draw is a complimentary gift offered to the player after he or she has made a previous purchase.

The goods sold may not be redeemed for legal currency; that is, the platform should not open or otherwise facilitate the repurchase function. With the introduction of the popular game Counter-Strike: Global Offensive (CS:GO) as a form of electronic sports competition and tournament, and the fact that the official trading platform launched by CS:GO allows for the sale and purchase of gun accessories with legal currency, various illegal electronic sport platforms use gun accessories as tokens in tournament bets. This avoids the direct use of legal tender to place tokens, and the virtual commodities are eventually allowed to be exchanged for legal tender directly or indirectly, ultimately achieving the purpose of gambling. The Notice on Regulating the Operation Order of Online Games and Prohibiting the Use of Online Games for Gambling clearly stipulates that enterprises must not provide the service of exchanging virtual currency in games into legal tender.

Accordingly, if the two-way exchange between virtual currency and legal tender is realised in the form of repurchase on official platforms or a secondary trading market, such as where the products won in the lucky draw are transformed into legal tender or other goods having an ’economic interest’ equivalent of legal tender (eg, shopping cards, consumer coupons and commercial prepaid cards), creating a closed loop of funding from legal currency to virtual currency and back to legal currency, it may constitute the crime of illegally running a casino or illegal gambling.

In Criminal Judgment No. 2614 (201)], the accused set up an online gambling platform, through which consumers could exchange currency 1:1 for guessing coins used when engaging in online gambling. Consumers could also use the guessing coins to purchase a ‘Jingdong e-card’, a single-use prepaid card used to purchase Jingdong’s own products, while the defendant would contact third-party entities for purchases using cash and collect Jingdong e-cards from consumers. The court determined that this business model constituted a two-way exchange between virtual currency and legal tender, and the defendant was accused of illegal gambling.

The merchandise involved in the transaction must be products that can be legally circulated. The products cannot be those that are prohibited or restricted by law, nor can they violate public policy and the principles of good morality. Further, according to the Product Quality Law, sellers must adopt measures to ensure the quality of products for sale, and sellers may not sell any product that has been put into disuse by order of the state, nor any expired products or those that have deteriorated.

The seller should have obtained legal qualifications for its business operation. According to the Tobacco Law, the Drug Administration Law and the Food Safety Law, as well as other commodity control laws and regulations, any unit or individual selling goods within a special category should obtain prior qualification before selling those goods; therefore, operators running Ichiban Kuji, magic rewards or similar business activities must not place special products in the prize pool without having obtained the corresponding qualification in advance.

Open and fair transactions

According to the Law on the Protection of Consumer Rights and Interests, transactions between operators and consumers must comply with the principle of open and fair transactions, and consumers are entitled to rights such as quality assurance, reasonable prices and correct specifications when purchasing goods.

In terms of consumers’ rights to open and fair transactions, Ichiban Kuji has prominent problems because its prize pool comprises prizes that are products derived from animation IP, and the products in the prize pool are categorised according to their cash value, so the different categories of prizes may involve completely different types of products. For example, the prizes for the lower E or F tiers may be stickers, cards, posters and other items with very low market value. This leads to two main problems:

• the fair value of the lower-tier prizes may be much lower than the amount consumers need to pay to participate in Ichiban Kuji; and
• the fair value of the different prize tiers varies significantly, so different consumers pay the same price but can purchase essentially different grades of goods, both of which would violate the principle of open and fair transactions.

Magic rewards seem to be more viable:

• The operator eliminates problem (1) by labelling the market price of the different prizes in the prize pool so that consumers believe and are aware that the market price of the ordinary prizes (the lowest-tier prizes) is the same as the price they would have to pay to participate in the magic rewards.
• The operator eliminates problem (2) by avoiding differences in prizes between the prize pools. In the case of the 3C equipment prize draw, for example, the operator groups prizes of the same category or similar categories in the same pool, so the difference between the value of the lower-tier ordinary edition prizes and the higher-tier hidden edition prizes is seemingly not significant, at least for the same type of goods. The difference in value, therefore, seems to differ only because of the added value of the IP or the brand value of the goods.

In any case, however, the price of goods must still follow the principles of fairness, legality and good faith and conform to market standards. At the same time, operators must provide consumers with reasonably priced goods and services, keep the price of goods within a reasonable range and not falsify, or take advantage of, its position in the transaction to raise the price of goods and profit from it.

Full knowledge

Although Ichiban Kuji is offered to consumers in the form of a ticket, the probability of the first prize can be announced in real time. Consumers can also see in real time that the best award in the pool has been awarded before his or her ticket has been drawn, so they have enough information to decide whether to continue to participate in the draw. Regarding the probability of the Ichiban Kuji, since the total number of items in stock for each set of Ichiban Kuji is fixed (eg, 500 items from tier A to the lowest tier), and each draw must have the corresponding prize delivered, there is no possibility that the consumer receives nothing.

In the case of magic rewards, although the probability of drawing different prizes in the prize pool is announced on the product display screen, there are many controversies about how the probability is calculated and its authenticity. For example, the probabilities announced by magic rewards are not real-time probabilities, but only the initial probabilities for the legendary edition, the lucky edition, the hidden edition and the ordinary edition. The magic rewards platform does not update in real time based on the actual drawing of prizes in the prize pool.

According to the Law on the Protection of Consumer Rights and Interests, consumers have the right to know accurate information about the products. The operator must disclose the probability of drawing prizes in the prize pool in advance and publish accurate information about the prizes. If the operator is unable to ensure the truthfulness or real-time availability of the probability of the product, this may constitute fraud against the consumer and risk violating the consumer’s right to know.

Protection of minors

In ‘open-box’ business activities, situations in which minors become the subject of transactions to purchase are not rare. In China, minors under eight years of age are not allowed to engage in transaction activities, while minors over eight years of age can independently carry out transaction activities commensurate with his or her age and intelligence.

However, according to relevant court cases:

because blind box itself is an entertainment product with probabilistic properties, to a certain extent, there is the possibility that minors lose judgment and self-control, [so] operators should be more prudent when selling blind boxes to minors, in order to protect minors, but also to ensure the safety of their own transactions. 

Ichiban Kuji, magic rewards and similar business activities, therefore, are also subject to this principle.

It is recommended that operators apply for copyright and design patents for the art works of the outer packaging of goods and register relevant trademarks in a timely manner. Further, if relevant patents exist, operators must also apply for patents in a timely manner and, if needed, file complaints to consumer associations, collect relevant evidence for the court when infringement is found and actively defend their relevant rights and interests. The operator must not use its business activities to infringe the IP rights of others, for example, the goods of popular animation programmes, anime and other IP series that need to be legally and effectively authorised by the owner of the relevant IP rights (eg, copyrights, trademarks and patent rights).

By: Mark Cheng Chen Gan

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SOURCES: Jincheng Tongda & Neal – Lexology.